USD/JPY intermarket: Bulls Need Higher Adj in 10-y US-JP Spread
One week ago, a significant divergence
between the 10-year US-JP yield spread was identified, one which was
suggesting the possibility of the pair being too cheap based on its
yield valuations. Ever since, the pair has strengthened from 107.00
towards 109.50, before settling in a 108.50-109.50 balance area.
Risk appetite, Fed fund rates fuel the recovery
The rise in the USD/JPY has been led by a pick up in the Fed fund rate (see XFFE contract in XETRA), together with a decrease in the VIX index and strength in the Nikkei 225, exchanging hands above 16,500 from 16,100 or thereabouts 1 week ago. The correction lower in Gold has also weighed on USD/JPY (the 20-day correlation coefficient is at its lowest since early March, currently at -0.89), as the risk on environment improved.
Misalignment in 10-year US-JP yield spread
At this stage, however, as the pair rises, it is worth noting that despite an increase in the Fed fund rates, which represents a more hawkish view in the Fed raising rates at least one time this year, the move up has not been backed up by the 10-year US-JP yield spread, which has moved quite sharply in favour of the Japanese Yen, mainly on US 10-year yield weakness. Should buyers expect higher prices, one of the key themes for this week might be how the US bond yields perform, as it would be hard to justify a breakout of the current 1 cent USD/JPY balance area unless the US-JP yield spread starts to re-adjust into higher territory, in line with the Fed fund rates.